Stenger defense contends top state officials knew of fraud

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Stenger defense contends top state officials knew of fraud

Mon, 09/27/2021 - 10:48am -- tim

Grim-faced state officials at the press conference announcing the Jay Peak fraud April 14, 2016: From left, DFR Commissioner Susan Donegan, Governor Peter Shumlin, Attorney General Bill Sorrell and Commerce Secretary Pat Moulton. VBM photo

by Mike Donoghue, Correspondent, Vermont Business Magazine With the three primary criminal defendants awaiting sentencing in federal court in Vermont for their part in the massive EB-5 investment scandal in the Northeast Kingdom, now attention turns to trying to confirm reports whether key state officials knowingly sat on Vermont's largest fraud case and chose not to make it public for at least one year.

Defense lawyers Brooks McArthur and David Williams, on behalf of William Stenger, are hopeful that some, if not all, records, including FBI and IRS reports and interviews that are currently under seal, will be made public before their client is sentenced later this year.  

McArthur has said he plans to ask that Stenger, the former president of Jay Peak, get no prison time because he was duped by two co-defendants, Ariel Quiros and William Kelly, both of Florida.

McArthur has called Quiros and Kelley career con men and fraudsters.

Stenger, 72, of Newport could get up to 5 years in prison after pleading guilty in August to making false statements during a failed effort to build a major biotechnology plant in Newport with use of EB-5 money from foreign investors.

Federal prosecutors filed a 99-page brief on September 20 maintaining that Stenger was a key figure throughout the scheme and took steps to further the scam.

Bill Stenger listens as his attorney Brooks McArthur makes a statement following Stenger's initial arraignment on May 22, 2019. VBM photo.

Chief Federal Judge Geoffrey W Crawford has set aside nine days for an evidentiary hearing beginning October 12 in Rutland to hear testimony and arguments about the offense conduct by Stenger.

The information generated from the Stenger hearing is designed to help the US Probation Office write an extensive presentence investigation report that will eventually be used to sentence the local businessman.

Meanwhile the government has said it plans to seek more than 8 years in prison for Quiros, the former owner of Jay Peak and Burke Mountain Ski Resorts, as part of a plea bargain struck with him.

Authorities have said Quiros was the mastermind of the multi-million dollar fraud.

Quiros, 65, of Key Biscayne, FL, pleaded guilty in August 2020 to charges of conspiracy to commit wire fraud, money laundering and the concealment of material information.

Kelly, 72, of Weston, FL, also has reached a plea deal that could get him up to 3 years in prison. He has pleaded guilty to two felony counts: conspiracy to commit wire fraud and concealment of material information.

A fourth defendant in the federal case in Vermont, Jong Weon Choi, also known as Alex Choi of South Korea, remains on the run, federal authorities have said. Choi was convicted in South Korea for financial fraud in 2016 in connection with AncBio Korea, the Vermont indictment noted. The proposed Vermont venture was tailored after the project in Korea, officials said.

Class Action Lawsuit

Meanwhile a class action lawsuit has been filed against the state of Vermont and some of its major players, including seven current and now former state officials and up to 10 "John and Jane Does" – with names to be determined.

The lawsuit echoes much of what Williams, one of Stenger’s criminal defense lawyers, wrote in a 35-page motion recently seeking to unseal certain documents.

With the federal criminal case winding down, the latest civil lawsuit suit filed by defrauded investors could help find many of the answers that Vermonters have been wondering about, including whether state and federal regulators were less than forthcoming through the years when they learned about the fraud.

The new civil lawsuit and Stenger’s recent filing maintain top state officials knew by 2014 about the fraud and had circulated documents as of March 2015.

Yet they waited 13 more months to go public in April 2016, the lawsuit maintains.

The FBI, IRS and the US Attorney for Vermont were alerted at least by September 4, 2015, according to a state timeline from the Department of Financial Regulation from December 2014 to December 2015.

It was attached by Williams to his motion seeking the unsealing of records.

The timeline noted there were conference calls with the SEC, FBI, IRS, DFR and Attorney General on September 16, September 25, October 2, October 9, October 16, October 23, October 30, November 2, November 13, November 20, and December 3, 2015. Sprinkled in between those 11 conference calls, there were eight meetings of the “Investigative Team.”

Among those named as defendants in the latest civil lawsuit are: former Agency of Commerce and Community Development (ACCD) Secretary Patricia Moulton; former Department of Financial Regulation Commissioner Susan Donegan; her former deputy commissioner Michael Pieciak, who is now in the commissioner’s seat; and Eugene Fullam, the then-executive director of the Vermont Regional Center, which was initially run by ACCD.

Also sued are three state lawyers for their work: Vermont’s longtime Chief Assistant Attorney General William Griffin, who provided legal advice to the state throughout the case; David Cassetty, former general counsel of the Department of Financial Regulation, and John W Kessler, the general counsel for the ACCD.

The defendants are expected to file written responses to the lawsuit next month.

Donegan is believed to be living in Florida, Cassetty in Nevada, and Fullam in Massachusetts, court papers note. The rest remains in Vermont.

Moulton, who is now president of Vermont Technical College, was ACCD secretary during the state’s oversight and administration of the Jay Peak projects, the lawsuit noted.

The claims against the state also include the Vermont Attorney General’s Office, the Department of Financial Regulation and the Agency of Commence and Community Development.

The seven plaintiffs have filed the lawsuit in their behalf, but also are asking that they can represent others that were similarly defrauded.

Making The Claims

EB-5 is a federal program that enables immigrants to invest $500,000 in US-based projects in exchange for a so-called "Green Card" that would allow permanent residence in the United States if a certain number of jobs were created.

AncBio in Newport and QBurke were the last of eight projects targeted in the Northeast Kingdom.

While the first six projects were centered at Jay Peak, AncBio was the seventh and was planned on a 25-acre site that was the former home of a Bogner plant on the outskirts of downtown Newport.

The QBurke was the eighth project and included a hotel and activity center planned for the Burke Mountain Resort, a smaller ski area near St Johnsbury.

The civil lawsuit claims Quiros stole millions of dollars in 2007 from immigrant investors to purchase the Jay Peak Resort in the town of Jay, about 18 miles west of Newport City.

"There was nothing legitimate about this transaction. The immigrant-investors did not even know the identity, existence or involvement of Ariel Quiros with Jay Peak," according to the lawsuit filed by Stowe lawyers Russell Barr and Chandler Matson.

The investors only knew the outward facing actors for the various Jay Peak investment opportunities: Bill Stenger, the long running steward and manager of the Jay Peak ski resort; the Vermont Regional Center and a bunch of government officials who championed the Jay Peak Projects as a way to bring much needed investment to the Northeast Kingdom, the lawsuit noted.

Perhaps the most troubling allegation is state officials and regulators were well aware of all of the fraud and that as early as March 2015 a so-called "Spaghetti Map" was created showing where investment money was received and where it was improperly diverted, records show.

Former Attorney General Bill Sorrell with the "Spaghetti Map" on April 14, 2016. VBM photo.

“The partnership between Jay Peak and the Vermont Regional Center would result in hundreds of millions of dollars flowing into Vermont. Within these projects, however, hundreds of millions of dollars would also be misspent, misused, and flat-out stolen in a Ponzi-scheme that touched every dollar invested,” the plaintiffs maintain.

"The graphic depiction of the illegal money flows at the Jay Peak Projects and misuse of investor funds throughout the Jay Peak Projects" was circulated amongst the office of Governor Peter Shumlin and the Vermont Regional Center, the lawsuit said.

The large white board map used spaghetti strands to show where all the money was misdirected, records maintain.

“As explained below in 2015, with full knowledge of the Ponzi-scheme’s detailed machinations,” the State of Vermont and the named defendants took investor money and “they used it to complete the hotel at Burke Mountain, to pay Vermont contractors, and to facilitate the tax revenues that the State continues to enjoy today,” the 35-page lawsuit said.

"The Spaghetti Map would not be revealed to the public or investors until April of 2016 after all the Jay Peak Projects had been placed into receivership for liquidation," the complaint notes.

Donegan, Pieciak, Griffin and Cassetty “amongst others within State government,” knew that the Jay Peak projects were a Ponzi scheme, the lawsuit said. Yet no mention was made in promotional efforts to get investments around the world for the AncBio in project in Newport.

The plaintiffs maintain that the action of the defendants was an unjust “taking” and the state employees showed “gross negligence.”

The seven immigrants filing the lawsuit are from Chad, Columbia, Brazil, Nigeria, Mexico, Vietnam, and one with citizenship in China and Canada.

Coming Undone

As part of the financial review, DFR Deputy Commissioner Michael Pieciak obtained Jay Peak’s bank records from Raymond James, which indicated that Quiros, as a key player in the projects, “had been systematically looting Jay Peak EB-5 investor funds for years,” the lawsuit said.

Brent Raymond, as VRC director, also got bank statements that showed evidence of the Ponzi-scheme since August 2008, court papers show.

By March 2015 the VRC told then-Governor Shumlin “about accounting irregularities, transactions that did not make sense, as well as illicit purchases of property and luxury items throughout the Jay Peak Projects,” the records show.

During the summer of 2015 Cassetty began to draft a legal complaint “along with an army of people” from the Attorney General’s office. Quiros, Stenger, Kelly and each phase of the Jay Peak Projects were mentioned, including AncBio and QBurke, the lawsuit said.

The complaint said Quiros and Stenger “have orchestrated a large scale investment scheme to defraud investors participating in the ‘EB-5 Program.’” It said to date they had fraudulently raised $402.5 million and collected an additional $40.25 million in fees.

Yet the draft complaint was never filed by state officials, the lawsuit said.

It said instead another $43 million was collected from trusting and unsuspecting investors and nothing was mentioned to the QBurke investors about the problems uncovered by the state.

Jay Peak President Bill Stenger speaks from the podium as Ariel Quiros listens as plans for the AncBio project are announced in Newport on May 14, 2015. VBM photo

By the summer and fall of 2015, Cassetty and Griffin took control of investor funds and released them for payment to Vermont contractors, court records show.

In April 2016, the hotel at Burke was largely completed and the last of the investor funds were paid to Vermont contractors for the local project.

“Within days thereafter, the Jay Peak Projects – including QBurke—were plunged into liquidation and receivership,” the lawsuit noted.

The lawsuit filed by the Security and Exchange Commission and the receivership were announced at an April 14, 2016, news conference called by Shumlin, Moulton, Donegan and Attorney General William Sorrell.

It was the first time that the “Spaghetti Map” was shown to investors and the public.

The federal indictment against the four defendants was announced in mid-May 2019 more than 3 years after the civil action taken by federal and state regulators.  

The federal lawsuit makes various misconduct claims of action, including conspiracy by Moulton, Donegan, Pieciak, Kessler, Griffin, Cassetty and Fullam along with other known and unknown conspirators.

Mike Donoghue is a Burlington-based correspondent.